Event: Tesla reports their Q4 results tonight after the close. The options market is implying about a 8.5% one day move which is greater than the average over the last 4 quarters of about 7%.
Expectations: One reason for the high implied move (that has creeped up this week) is the increasingly dire expectations for Model S deliveries in China. On two occasions in the last month CEO Elon Musk has dropped more than subtle hints that Q4 was bad in China. First on Jan 13th, Musk stated the following, which caused the stock to open down 10% the next day, and close down 6%, per CNN Money:
“Things were a little weaker in China because of some communications issues, most importantly around charging,” he said. “There was a misconception that charging was difficult in China.” The main issue was that people, mainly in big cities, thought they would not be able to have a charger at home, Musk said.
And then yesterday, Reuters reported that Tesla sold only 120 cars in China last month (read here) and Musk is threatening his second shake up of management in a country that is imperative to their growth.
Estimates and Forecasts from Bloomberg
-4Q adj EPS est. 32c (range 14c-40c); co. forecast 30c-35c (Nov. 5)
-4Q rev. $1.23b (range $1.05b-$1.30b)
-4Q Model S deliveries (avg of 7): 10,832 vs TSLA guidance for 11,200
Com[any has guided to “approximately 33,000” deliveries in 2014
Vol SnapShot: short dated options prices are below the levels where they have been prior to the last three quarterly reports, possibly suggesting slightly less caution with the stock down nearly 30% from the all time highs made in September:
[caption id="attachment_50844" align="aligncenter" width="600"]
TSLA 1y chart of 30 day at the money IV from Bloomberg[/caption]
Price Action/Technicals: the stock shook off the China news in mid January, rallying back well above the levels it initially sold off 10% from, but the stock is still down 6% on the year. The 20% rally off of the Jan 14th low re-tested the downtrend that has been in place since the Sept highs, and has now since failed in sympathy with the China sales news overnight, stock is down 3.5% as I write:
[caption id="attachment_50845" align="aligncenter" width="600"]
TSLA 2yr chart from Bloomberg[/caption]
In my opinion, the chart is a disaster, possibly setting up for an epic breakdown. The next time it enters the $200/$180 support zone, it may take months to come out.
Obviously there is another way to look at it, sentiment is poor, short interest is high (28% of the float) vs Elon Musk’s 22.5% stake which he is not likely to ever sell. So a beat, and raise of delivery expectations could easily cause a 10-20% rally like we saw in AMZN and NFLX in the last few weeks.
My View: I have no view on valuation, because it doesn’t matter, you’d be a fool to make this the hot button issue for a trade in a stock like this, until we are no longer in a bull market when mundane things like triple digits P/Es matter. But what does matter is deliveries of cars and the ability for investors to see the road map to triple digit thousands of deliveries in a year, up from the expected 33,00o in 2014 and 55.000 or 60,000 this year. Obviously the longer oil stays in the dumps, the more that analysts will ratchet down their expectations for Tesla’s upcoming mass market Model 3. Despite it not being expected for two years.
Last week in a post titled TSLA: Powering Down? I also highlighted what I see is another potential overhand for the company, a capital raise:
the company has raised a lot of capital since its June 2010 IPO, doing capital raises in every year with secondary share offerings in 2011, 2012, 2013 and issuing $2 billion in convertible debt last February:
I suspect in front of the build out of the company’s “gigafactory” that analyst expect to cost billions, the company will once again tap the capital markets to raise cash. Obviously I have no idea on timing, but this could be an overhang for the shares at a time where the bloom seems to be off the rose a bit, as competition is coming online (recent ad storm from BMW on i3 and i8) and lower end cars recently announced from Detroit.
I see little to get excited about TSLA here. I am captivated by the story, the car (I’ve driven an S and it is amazing) and of course the promise of Elon Musk becoming the next coming of Steve Jobs. I am just not sure you have to step up at the moment. I see little that could catapult the stock back to the highs in the very near term.
But I wouldn’t short it either. Sentiment is poor, the company has not been shy of leaking bad news before the print (smart). Low oil has changed the narrative a bit about electric vehicles, but that could change as quickly as oil and in the long term electric seems like the future. Outright long premium trades into the print seem like a tough way to make money.
One trade I considered was selling a weekly put at the implied move (in that important technical support zone between $200 and $180) and using the proceeds to buy a longer dated put. But it seemed too cute for me, especially considering I’m positively predisposed to the story over the long term